Understanding and Navigating Sales Tax Regulations Workshop

1. WORKSHOP ON SALES TAX Pearl Continental Hotel, Karachi21 – 22 July2005

2. PROVINCIAL SALES TAX ON SERVICES By MAJID KHANDWALAPartnerFord Rhodes Sidat Hyder & Co.

3. PROVINCIAL SALES TAX ON SERVICES • Services tax under the Ordinance • Excisable services taxed under the Act • Issues relating to services tax

4. PROVINCIAL SALES TAX ON SERVICES Services tax under the Ordinance Enforced through • Provincial Sales Tax Ordinances,2000 with effect from July 1, 2000 • Islamabad Capital Territory (Tax On Services) Ordinance, 2001 with effect from August 18, 2001 • All the provisions of the Sales Tax Act, 1990 made applicable • Sales tax rate 15%

5. PROVINCIAL SALES TAX ON SERVICES Services covered with effect from July 1, 2005 • Hotels • Clubs • Caterers • Advertisement on TV and Radio excluding • those sponsored by Government agency for Health and Education • those sponsored by Population Welfare Division re Sathi educational promotion campaign funded by USAID and • those public service messages telecast on TV by WWF and UNICEF • Customs agents • Ship Chandlers • Stevedores • Courier Services

6. PROVINCIAL SALES TAX ON SERVICES Service withdrawn with effect from July 1, 2005 • Marriage Halls and lawns • Beauty Parlours, Beauty Clinics and Slimming Clinics • Laundries and Drycleaners

7. FEDERAL EXCISE DUTY IN SALES TAX MODE Other services subject to Federal Excise Duty under Federal Excise Act, 2005 to be levied and collected as if it were a Sales Tax under the Sales Tax Act, 1990 SRO 648(1)/2005 dated July 1, 2005 specifies the following services – • Advertisement on closed circuit TV • Advertisement on cable TV network • Inland Travel by air • Travel by train in air-conditioned Sleeper and Parlour Class and First Class Sleeper (12.5%) • Inland Carriage of good by air • Shipping Agents • Telecommunication Services (new additions) • Payphone cards and prepaid calling cards • Wireless Local Loop • Exempt telecommunication services • Billings by internet service providers • International leased line charges payable by registered software exporting firms and licensed data and internet service providers • Pager service

8. PROVINCIAL SALES TAX ON SERVICES The Sales Tax Special Procedures Rules, 2005 Chapter IX - Special Procedure for Persons Providing or Rendering Taxable Services Contains General Provisions Contains Specific Provisions as follows - Part One – Custom House Agents and Ship Chandlers Part Two – Courier Services Part Three – Advertisementson Television and Radio

9. PROVINCIAL SALES TAX ON SERVICES General Provisions –Significant aspects • In the case of Hotels, Stevedores and Courier services – gross amount charged is subject to tax. • In the case of Clubs, taxable service does not include consideration received for membership fees, refundable deposits or security. • Tax point in case of services provided over a period of time is upon completion of service or receipt of money, whichever is earlier. • Where an extended credit facility is provided, invoices may be raised at the end of each month. • Input tax on purchases and imports and utilities like gas, electricity and telephone (excluding mobile telephone?) may be adjusted. • Input adjustment is permissible on paid (and not on payable) basis. • Apportionment Rules apply • Provisions of Section 59 apply in case of new registrants. • A single registration may be obtained in the jurisdiction of the Sales Tax Collectorate where he is assessed for income tax purposes.

10. PROVINCIAL SALES TAX ON SERVICES Special Provisions – Part One Customs Agents • Taxable service does not include consideration received on account of transportation charges, demurrage, wharfage, duties and taxes, toll taxes, municipal charges, port charges, handling charges, packing charges, labour payment and other reimbursable expenses. • Minimum benchmark level for value of taxable service per document is as follows -

11. PROVINCIAL SALES TAX ON SERVICES • Audit once a year if tax deposited less than minimum benchmark level per document • No routine audit if tax deposited in accordance with minimum benchmark level per document • Audit once in three years if tax deposited twice or more than the minimum benchmark level per document Ship Chandlers • Means a licensed person under the Customs Ship Chandlers (Licensing) Rules, 1980 • Who transacts business relating to supply of provisions and stores on any conveyance proceeding to any foreign port, airport or station • Taxable service does not include consideration received on other accounts such as transportation charges, toll taxes, municipal charges, port charges, handling charges, packing charges, labour charges

12. PROVINCIAL SALES TAX ON SERVICES Special Provisions – Part Two Courier Services • Taxable Services is any service provided by a courier company in relation to delivery of documents, goods or articles • No sales tax on office mail where the consignee and consignor are the same person • Refund may be claimed in respect of courier services related to export of goods where a goods declaration has been filed, treating such services as zero rated ? Special Provisions – Part Three Advertisements on Television and Radio • Input tax on advertisements routed through advertising agency permissible • Invoice format specified to allow insertion of name of advertising agency as well as the advertiser.

13. PROVINCIAL SALES TAX ON SERVICES Errors and Anomalies • Rule 61 states that audit of Custom house agents will be in accordance with Part Two of this Chapter. Whereas Custom House Agents have been dealt in Part One. • Rule 62 states that specific provisions relating to particular categories of service providers are contained in Part One to Five of this chapter. Actually there are only Three Parts in the chapter. • Input and output tax definition in Sales Tax Act, 1990 has not been updated to include Federal Excise Duty in place of Central Excise Duty. • There is no mention of provincial sales tax on services in the input and output tax definition. • Custom house agents who levy charges on basis of table would not be able to claim input tax if they wish to avoid audit. • Has input tax claim for charges paid to courier company been restricted to registeredexporters. • Stores and provisions supplied for consumption abroad a conveyance proceeding to a destination outside Pakistan is zero rated. On the same analogy should the services rendered by Ship Chandlers be also zero rated.

14. PROVINCIAL SALES TAX ON SERVICES Errors and Anomalies • Stevedoring services has no exclusion for reimbursement of third party payments. • Telephone bills do not contain sales tax registration number. • Mobile phone bills are usually in the name of individuals. • Service providers are akin to retailers as they render services to the general public who utilize these services. Are service providers having annual turnover of less than Rs. 5 million exempt under Table 2 Serial No. 3 of the Sixth Schedule. This concept has been accepted through clarification (now repealed) given in respect of Hotels vide Ruling/Instruction 63/2002 and for Beauty Parlours, Slimming clinics, Laundries and Drycleaners vide Ruling/Instruction 1/2003. • Billing for services rendered to persons residing outside Pakistan should logically be zero rated as it is akin to export of goods.